Baumol and Bowen proposed the cost disease in a 1965 essay on cost rises in the performing arts. Innovation helps workers produce more output in many sectors of the economy, such as agriculture and manufacturing, which pushes up wages throughout the nation. However, other sectors, such as the performing arts, cannot economize on labor so easily in the face of rising wages. A string quartet required the same number of musicians in 1800 as it does today. Something has to give, and so prices rise to cover the extra labor costs.

Baumol expounded on the cost disease as it relates to higher education in a follow-up essay: “The relatively constant productivity of college teaching…suggests that, as productivity in the remainder of the economy continues to increase, costs of running the educational organizations will mount correspondingly, so that whatever the magnitude of the funds they need today, we can be reasonably certain that they will require more tomorrow, and even more on the day after that.”

With better technology, fewer workers on an assembly line can produce the same number of cars. But technology can’t make larger class sizes any more palatable. According to Baumol, the rise in college tuition is inexorable and eternal as professors’ salaries rise, but the number of students they teach does not.

While this phenomenon certainly occurs, its role in soaring college tuition has been greatly exaggerated. In a 2012 study, economists Robert Martin and Carter Hill analyzed the various trends underlying ever-higher expenditures at public research universities to determine how much of the increases were attributable to Baumol’s cost disease.

Salaries and benefits at universities rise faster than inflation, consistent with the cost disease. But compensation can rise for different reasons. If labor costs rise because the compensation of professors rises, the cost disease is likely responsible. But if labor costs rise because universities are hiring different sorts of employees, such as administrators, something besides the cost disease must be the culprit.

Using this method, the authors determine that Baumol’s cost disease accounts for just 16% of the total increase in spending at public research universities from 1987 to 2008. The remainder is due to a variety of factors, but one of the most important is the revenue theory of costs—the idea that colleges and universities exploit all sources of revenue made available to them, and bump up spending to match whatever funds they can raise. Unlimited student loans courtesy of the federal government therefore act as a spending enabler.